Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment for the entire duration of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments on your fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call Reliance Mortgage Service, Inc at 562 320-0510 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in a given period. Almost all ARMs also cap your rate over the life of the loan period.
ARMs most often feature their lowest rates at the start. They guarantee that interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit people who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky if property values decrease and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at 562 320-0510. It's our job to answer these questions and many others, so we're happy to help!